Menu  4 ABR 480
UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF ALASKA


  
In re: Case No. A93-00889-DMD) 
 ) 
MARTECH USA, INC., a Delaware)
corporation,) 
 ) 
Debtor.) 
___________________________________) 
 )Bancap No. 96-3108
KENNETH W. BATTLEY, Trustee,) 
 ) 
Plaintiff,)Adv. No. A93-00889-195-DMD
 )Chapter 7
v.) 
 ) 
NATIONAL BANK OF ALASKA, a) 
national banking association,) 
 )
Defendant.) 
___________________________________) 


ORDER DENYING PLAINTIFF'S MOTION FOR RECONSIDERATION


      Pending before the court is the plaintiff's Motion for Reconsideration and to Alter or Amend Judgment and to Substitute a Party Plaintiff to Pursue Avoidance Claims, filed December 5, 1996. The motion seeks reconsideration of this court's Order Resolving Pending Motions, filed November 25, 1996. Having reviewed the motion, opposition and reply thereto,

     IT IS ORDERED:

     1) The plaintiff's motion for reconsideration, filed December 5, 1996, is denied, with prejudice, as to that portion seeking reconsideration of this court's prior order.

     2) The plaintiff's alternative motion for leave to substitute a party plaintiff is denied, without prejudice. The court will entertain a renewed motion to substitute a party as plaintiff which properly identifies the creditor or creditors who will prosecute the preference claim against the vessels. The renewed motion must be filed within thirty days of the date of this order, or the prior order dismissing the preference claim as to the vessels shall be with prejudice as to all parties.

  TOP   4 ABR 481      3) In the event that a creditor or creditors are substituted in as plaintiff, the preference claim regarding the vessels will be severed for trial. The counts remaining in this action will continue to be prosecuted by the trustee and the deadlines previously set by this court will remain in effect.

Analysis

1. Motion for Reconsideration
     The trustee moves for reconsideration pursuant to either Fed. R. Bankr. P. 9023 or 9024. These rules make Fed. R. Civ. P. 59 and 60, respectively, applicable to bankruptcy proceedings. Reconsideration is appropriate under Rule 59 on the following grounds: "(1) manifest error of law; (2) manifest error of fact; and (3) newly discovered evidence." Wolkowitz v. Shearson Lehman Brothers, Inc. (In re Weisberg), 193 B.R. 916, 928 (9th Cir. BAP 1996), citing Brown v. Wright, 588 F.2d 708, 710 (9th Cir. 1978); see also School Dist. No. 1J, Multnomah County, v. ACandS, Inc., 5 F.3d 1255, 1263 (9th Cir. 1993), cert. denied ___ U.S. ___, 114 S.Ct. 2472 (1994). If a motion for reconsideration is treated as a Rule 60(b) motion, relief is available "only upon a showing of (1) mistake, surprise, or excusable neglect; (2) newly discovered evidence; (3) fraud; (4) a void judgment; (5) a satisfied or discharged judgment; or (6) 'extraordinary circumstances' which would justify relief." School Dist. No. 1J, 5 F.3d at 1263, citing Fuller v. M.G. Jewelry, 950 F.2d 1437, 1442 (9th Cir. 1991).

     The trustee's motion presents no new evidence to the court, nor does it make any of the required showings for Rule 60(b) relief. Accordingly, the motion will be viewed as one for relief under Fed. R. Civ. P. 59 and Fed. R. Bankr. P. 9023, on the grounds of manifest error of fact or law.

     The trustee's motion takes issue with this court's findings that the cash collateral agreement encompassed a waiver by Martech, as debtor-in-possession, of the right to attack NBA's security interests in vessels as preferences, and that this waiver is binding upon the trustee. The waiver language contained in the cash collateral agreement provides, on page 2, paragraph 1.(a), as follows:
     (a) The Bank asserts that the Bank has valid,   TOP   4 ABR 482 perfected and enforceable liens in all of the Debtor's right, title and interest in, to and under the collateral referred to in the Security Documents to the extent that such collateral existed at the time the Petition was filed (collectively, "Pre-petition Collateral") and that all of the Pre-petition Collateral secures all of the Debtor's obligations and liability under the Loan Documents, and the Debtor waives the right to challenge these assertions by the Bank. . . .
The trustee advances two arguments in support of his motion for reconsideration:
1. The waiver contained in the cash collateral agreement only precluded a challenge as to the validity and perfection of NBA's security interests, and did not encompass a waiver of preference claims;

2. Any waiver of preference claims was personal to the debtor, and not binding on the trustee.

     The trustee's first argument is directly contrary to his previously stated position regarding the scope of the waiver. In his opposition to NBA's motion for summary judgment, the trustee stated, "NBA's claim of waiver is based on a personal waiver of avoidance claims by the debtor within a cash collateral agreement."(1)

     The trustee's argument regarding the limitation of the waiver is also unsupported by the record in this case. The potential preference claims against the Martech vessels were noted in the debtor's initial motion for use of cash collateral.(2) The preference claims were also discussed at the emergency cash collateral hearing, held on December 23, 1993, as follows:
     THE COURT: Why don't we talk about that just a little bit. And maybe you can tell Mr. Burns and the U.S. Trustee here, Mr. Ordin, what collateral is NBA or the surety getting that they didn't have pre-petition? What are you giving up for this financing?

  TOP   4 ABR 483      MR. ORDIN: The surety is not getting anything in -- except the fi- -- the draw-down on the letter of credit, which was something that was -- they were entitled to directly in their relationship with the bank.

     With respect to NBA, there is some confusion. The security documents and financing statements we have seen would indicate that, assuming validity on their face, and we have not had a chance in the time we've been in this case to get deeply into it. But it would appear that the Navy, as we call it, there are several ships in which the security interests were committed to be given quite a long time ago. But the actual perfection under the appropriate perfection technique for documented vessels was recent, so it could be argued, other things being true, that that might have been a transfer which is avoidable with respect to those.

     THE COURT: Do you have an idea of what the value of those vessels are?

     MR. ORDIN: Well, Judge, it's hard to tell you. . . . I would think we're talking about a value in a range of ten to $16 million.

     MR. BUNDY: I hope you're right, Mr. Ordin.
     . . .

     THE COURT: I understand. I understand. But just -- back t- -- and I think that's in all of this -- all that's going on here, maybe that's getting lost. What you're talking about is improving SBA's -- or excuse me, not SBA's, NBA's collateral position to the extent of ten to $16 million. Rather, you're simply supplementing their existing collateral position such that if there's a decrease in value of their current collateral, it can be -- you'll -- there'll be a substitute lien as to these vessels or equipment to make up for the difference. You're simply adequately protecting SBA [sic]?

     MR. ORDIN: That was the plan. That was the theory, Judge.

     THE COURT: Okay.

     MR. BURNS: Your Honor, if I might. John Burns. I have a question for Mr. Ordin relative to whether -- as I read the motion, I'm somewhat concerned that the debtor is essentially waiving any defects to -- that may exist in security   TOP   4 ABR 484 interests that NBA may hold.

     THE COURT: But you are not, right?

     MR. ORDIN: Well, we are saying that the debtor is not going to assert them. But we don't prevent the creditors committee or anybody else who has the power to do that to exercise it.

Transcript of Proceedings re Hearing on Various Motions, December 23, 1993, p. 41, l. 20 - p. 44, l. 12 (Docket No. 1823)(emphasis added).

     In the debtor's subsequent motion for order approving cash collateral agreement with NBA, filed January 7, 1993, it was again noted that NBA's security interests in certain vessels had been granted just weeks before Martech's chapter 11 petition was filed. The memorandum in support of the motion further stated:
Although Martech cannot represent to the Court that NBA had as of the Petition Date liens on all of Martech's assets or that all of NBA's prepetition liens are validly perfected or otherwise unavoidable, Martech, in the exercise of its reasonable business judgment, has specifically agreed in the Cash Collateral Agreement not to contest the validity of NBA's liens or to dispute NBA's contention that it is oversecured. Nothing contained in the Cash Collateral Agreement or the Debtor/Surety Agreement, however, would limit the ability of the Committee, the United States Trustee, or any other party in interest to dispute either of these contentions.
Notice of Motion and Motion for Orders Approving Cash Collateral Agreement with National Bank of Alaska and Debtor/Surety Agreement for Use of Bonded Receivables and Other Relief, filed January 7, 1994, p. 17, n.4 (Docket No. 119)(emphasis added).

     The trustee refers to language in the third amended disclosure statement as evidence that the cash collateral agreement did not waive preference claims. The Revised Third Amended Disclosure Statement, filed September 30, 1994 (Docket No. 1458), provided, at page 38:
     Confirmation of the Plan shall extinguish and bar any claim of the Debtor or the bankruptcy estate against NBA, including, without limitation, all claims to avoid preferential or fraudulent transfers, and all contract or tort claims which the Debtor or its bankruptcy estate might have against NBA.
  TOP   4 ABR 485 The foregoing provision does not reflect the parties' intent in negotiating the waiver contained in the cash collateral agreement. This conclusion is supported by fact that the sureties, in their opposition to confirmation of the third amended plan, discussed both the cash collateral agreement and the plan's proposed release of claims against NBA as follows:
     Most important, however, the plan violates a prior order of the court that preserved the very rights the plan now proposes to release.

     At the December 23, 1993 hearing, in exchange for the use of cash collateral, Martech agreed it would not assert claims against NBA for preferences and other claims under the Code. Martech's counsel expressly stated and the court confirmed that Martech's waiver did not in any way extend to other creditors. Although the court's subsequent cash collateral order approved Martech's waiver, it reiterated that the waiver was not binding on creditors of the estate.
Sureties' Memorandum in Opposition to Confirmation of Third Amended Plan of Reorganization and in Support of Sureties' Motion to Convert, filed December 1, 1994, pp. 3-4 (Docket No. 1656)(emphasis in original). The sureties clearly felt that the waiver contained in the cash collateral agreement encompassed the debtor's right to avoid NBA security interests as preferences. The sureties indicated that the release proposed in the third amended plan gave up the right of creditors to attack potential preferences given to NBA, which right they had retained under the cash collateral agreement. The debtor had already waived that right. The sureties' interpretation of the waiver and the plan's proposed release is especially revealing, since the sureties were privy to the negotiations of the cash collateral agreement and the debtor/surety agreement, both entered contemporaneously at the outset of the case.

     In negotiating the cash collateral agreement, the debtor made a business decision not to attack NBA's security interests, including its interests in vessels, in exchange for the right to use NBA's cash collateral. The only ground stated for a potential attack on NBA's liens in the vessels was that the liens were given to the bank within the preference period. Based upon the record in this case, the scope of the waiver in the cash collateral agreement clearly encompassed the debtor's right   TOP   4 ABR 486 to attack NBA's security interest in the Martech "Navy" as preferences. The trustee's first argument is unpersuasive.

     The trustee's second argument is that the waiver in the agreement was not binding upon him in any event. In support of this argument, the trustee attempts to distinguish, on their facts, several of the cases cited by the court for the basic proposition that a successor trustee is bound by the acts of a debtor-in-possession. Although the cases are distinguishable on their facts, the basic premise for which the cases were cited is sound. It is unlikely, in any event, that a case with facts identical to those present here could be found, since situations involving the financing of a chapter 11 debtor necessarily hinge upon facts and considerations unique to each case.

     The trustee's reliance on Begier v. American Express, Inc. (In re American Intern. Airways, Inc.), 74 B.R. 691 (Bankr. E.D. Pa. 1987), does not assist his position. In Begier, the court acknowledged that a trustee is generally bound by a "court-approved stipulation" entered by a chapter 11 debtor, "particularly in situations where the terms of the agreement specifically bind the DIP's assignees or equitable considerations, such as the Trustee's acceptance of the benefits of the Stipulation, support the binding of the Trustee." Id. at 692. The stipulation at issue in that case did not expressly bind the debtor's assignees, nor had the trustee accepted benefits of the stipulation. Under the circumstances, the court granted a chapter 11 trustee leave to present "equitable and other arguments" as to why he shouldn't be bound to the debtor's stipulation, which waived the right to bring "claims arising under the Code" against creditor American Express Company

     In reaching its conclusion, the court in Begier discussed two competing policies which it felt went to the "heart of the issue." First, it noted that since the appointment of a trustee in a Chapter 11 case was an extraordinary remedy, it appeared unfair to saddle the chapter 11 trustee with an agreement which possibly reflected a poor management decision by the debtor-in-possession. The second policy dealt with a chapter 11 debtor's ability to conduct business:
     To hold that such a stipulation is not binding on the estate after the appointment of a trustee would greatly impair the ability of the debtor in possession to conduct its business because it would dis-
  TOP   4 ABR 487 courage third parties from dealing with the debtor in possession for fear that the court would later appoint a trustee and declare that the actions taken by the debtor in possession are invalid and not binding on the trustee.
Begier, 74 B.R. at 694, citing In re Philadelphia Athletic Club, Inc., 17 B.R. 345, 347 (Bankr. E.D. Pa. 1982).

     Because the facts in this case are clearly distinguishable from Begier, the second policy consideration is controlling. First, a chapter 11 trustee was not appointed here, so the first policy consideration is inapplicable. Further, the Martech cash collateral agreement expressly states that it is "binding upon the parties hereto and respective successors and assigns, and in the case of the Debtor, upon the creditors and other parties in interest in the Bankruptcy Proceeding and any trustee, receiver or examiner appointed therein."(3) Finally, the trustee in this case has accepted certain benefits of the agreement, in that he has recovered, for the benefit of the estate, a portion of the $1 million carve out for professional fees provided for in the cash collateral agreement. Under these circumstances, the general rule, that a trustee is bound by the court-approved actions of a debtor-in-possession, is applicable. "Creditors must be able to deal freely with debtors-in-possession, within the confines of the bankruptcy laws, without fear of retribution or reversal at the hands of a later appointed trustee." Armstrong v. Norwest Bank, Minneapolis, N.A., 964 F.2d 797, 801 (8th Cir. 1992).

     I am unpersuaded by the trustee's grounds for reconsideration. The cash collateral agreement's waiver encompassed preference claims against NBA's security interests in Martech's vessels. Further, the agreement, and its waiver, are binding on the trustee. He cannot seek to avoid NBA's liens in the Martech vessels as preferences.(4)
  TOP   4 ABR 488

II. Motion to Substitute Plaintiff

     As an alternative ground for relief, the trustee asks that leave be given to substitute one or more unsecured creditors as plaintiff to pursue the preference action, since all parties agree that the waiver did not bind creditors and other parties in interest.(5) He contends that if leave is not granted, the estate will be placed in the untenable position of being unable to pursue "an obvious preference claim" with a value of at least $1.7 million.(6)

     NBA, in opposition to this portion of the trustee's motion, argues that substitution of plaintiffs should be denied because the statute of limitations has run on the preference claim and the amendment would not relate back to the date of filing. NBA relies upon Louisiana-Pacific Corp. v. Asarco, Inc., 5 F.3d 431, 434 (9th Cir. 1993), for the proposition that relation back will not apply where a litigant who knows the identity of the proper party simply fails to name that party. This case is distinguishable from Louisiana-Pacific. Here, the trustee has named the proper party as defendant. He seeks to substitute another in his place as plaintiff.

     Rule 15(c)(3) of the Federal Rules of Civil Procedure governs the relation back of an amendment that substitutes a party in a proceeding. It provides:

     (c) Relation Back of Amendments. An amendment of a pleading relates back to the date of the original pleading when   TOP   4 ABR 489
     . . . .

     (2) the claim or defense asserted in the amended pleading arose out of the conduct, transaction, or occurrence set forth or attempted to be set forth in the original pleading, or

     (3) the amendment changes the party or the naming of the party against whom a claim is asserted if the foregoing provision (2) is satisfied and, within the period provided by Rule 4(m) for service of the summons and complaint, the party to be brought in by amendment (A) has received such notice of the institution of the action that the party will not be prejudiced in maintaining a defense on the merits, and (B) knew or should have known that, but for a mistake concerning the identity of the proper party, the action would have been brought against the party.
"While Rule 15(c) speaks only of a change in defendants, it applies by analogy to the substitution of plaintiffs." Raynor Bros. v. American Cyanimid Co., 695 F.2d 382, 384 (9th Cir. 1982).

     In In re Schurek, 139 B.R. 512 (Bankr. S.D. Ca. 1992), the bankruptcy court permitted a chapter 7 trustee to be substituted as plaintiff in place of a creditor who had filed a preference action. There, the court noted that, when applying Rule 15(c) by analogy to substitute a plaintiff, "the test for deciding whether to allow an amendment to relate back is . . . whether 'the [defendant] has received such notice of the institution of the action that the [defendant] will not be prejudiced in maintaining a defense on the merits.'" Id. at 515; see also 6A Wright, Miller & Kane, Federal Practice and Procedure § 1501 at 154 (2d ed. 1990). Applying this test here, it is clear that NBA has received notice of the claim being asserted against it. The preference claim regarding the vessels will be the same, regardless of whether an unsecured creditor or the trustee pursues it. Further, there is no showing that NBA will be prejudiced in maintaining a defense on the merits.

     The court in Schurek also noted that Rule 15(c) has the effect of "extending the statute of limitations to the end of the period for serving a summons and complaint provided by Rule 4(j), -- currently 120 days," and that an identity of interest between the named plaintiff and the substituted plaintiff need not be shown unless the proposed amendment   TOP   4 ABR 490 was made after the 120 day period had expired. Id. at 515, and n.4. In this case, the proposed amendment is outside of the 120 day period. An identity of interests can be shown:
when the change is merely formal and in no way alters the known facts and issues on which the action is based. The courts have freely upheld the filing of an amended complaint under these circumstances. [T]he substituted corporate plaintiff had such an identity of interest with the individual plaintiffs that the original complaint served to notify defendant . . . of the actual claim being asserted against it, with no resulting prejudice to its interests.
Raynor Bros., 695 F.2d at 384, citing Staren v. American National Bank & Trust Co., 529 F.2d 1257, 1263 (7th Cir. 1976). Similarly, in this case, the substitution of an unsecured creditor as plaintiff to prosecute the preference claim would be a "merely formal" change. The circumstances giving rise to the claim would remain the same as under the original complaint. Raynor Bros., 695 F.2d at 384. Accordingly, an unsecured creditor who chose to prosecute the preference claim in place of the trustee would have an identity of interests with the trustee.

     Finally, the policy considerations underlying Fed. R. Civ. P. 17(a), to avoid forfeitures of just claims, should be considered here. Schurek, 139 B.R. at 515, n.5. Rule 17(a) provides:
No action shall be dismissed on the ground that it is not prosecuted in the name of the real party in interest until a reasonable time has been allowed after objection for . . . joinder or substitution of, the real party in interest; and such . . . joinder, or substitution shall have the same effect as if the action had been commenced in the name of the real party in interest.
     The trustee's alternative motion to substitute an unsecured creditor or creditors as plaintiff to prosecute the preference claim as to the vessels cannot be denied on the grounds that such substitution will not relate back. However, leave to amend cannot be granted at this time because the motion fails to identify with particularity the party who will be substituted in the trustee's place. The motion will be denied at this time without prejudice. The trustee will be given a thirty day period within which to file a renewed motion that properly identifies the party to be substituted as plaintiff. If a renewed motion   TOP   4 ABR 491 is not brought within this time period, the preference claim as to the vessels will be deemed time barred as to all parties.

Conclusion

     The trustee's motion for reconsideration will be denied, with prejudice. The trustee's alternative motion to substitute a party plaintiff will be denied, without prejudice. The court will entertain a renewed motion to substitute a party as plaintiff which properly identifies the creditor or creditors who intend to prosecute this claim. In the event that a creditor is subsequently substituted in as plaintiff, the preference claim regarding the vessels will be severed for trial. The counts remaining in this action will continue to be prosecuted by the trustee and the deadlines previously set by this court will remain in effect.

     DATED: February 3, 1997.

BY THE COURT
DONALD MacDONALD IV
United States Bankruptcy Judge

1.   TOP    4 ABR 482  Trustee's Memorandum in Opposition to Defendant's Motion for Summary Judgment Dismissing Trustee's Claims, filed April 1, 1996, p. 5 (Docket No. 21) (emphasis in original).

2.   TOP    4 ABR 482  Emergency Motion for Order Approving Cash Collateral Agreement with the National Bank of Alaska, filed December 22, 1993, pp. 7-8 (Docket No. 27).

3.   TOP    4 ABR 487  Cash Collateral Agreement, ¶ 9, p. 7 (emphasis added).

4.   TOP    4 ABR 487  The Order Regarding Pending Motions, filed November 25, 1996, dismissed that portion of the trustee's preference and fraudulent conveyance counts which sought to avoid NBA's security interests in the vessels and a jet aircraft. It did not dismiss the remainder of the trustee's preference claims, which dealt with payments received by the bank, rather than security interests granted to the bank.

5.   TOP    4 ABR 488  The trustee infers that the court has somehow placed him in the "untenable position" in which he now finds himself based upon the clarifying order issued after confirmation of the third amended plan was denied. The trustee has placed undue reliance on the clarifying order. The merits of the preference claim, including the issue of whether the cash collateral agreement would preclude the trustee from pursuing it, had not been placed in issue and were not ripe for ruling until the cross motions for summary judgment were filed in this proceeding. The clarifying order simply confirmed that the preference claim had not yet been determined, and did not conclusively determine who had standing to pursue it.

6.   TOP    4 ABR 488  The only thing that is "obvious" about the preference claim against the vessels is that the liens were given to NBA within the preference period. In light of the replacement lien granted to NBA and the new value defense NBA has asserted, the value of this claim is far from obvious.